Tandem Group – The Annual General Meeting: dividends

On Thursday I, along with five other shareholders, attended the AGM of Tandem Group (LSE:TND). The directors were very gracious and generous in allowing us to ask questions and make our points for two hours. At times the discussion was, to put it politely, robust.  But the end result was that we shareholders understood the company so much more and understood the reasons behind director’s decisions.

I bought shares in Tandem in April at £1.59 when the market capitalisation was £8m. They’ve risen to £1.80.  (Previous Newsletters: 3^rd -11^th April 2019)

Dividend policy

At least half an hour was given over to a discussion of dividend policy. A question was raised on the logic of paying a mere 4.31p dividend when the company has produced EPS north of 30p and is expected to do so again this coming year.

Investors who have been with the company for 10-15 years have seen little capital gain (unless they luckily bought during one of the price cliff-falls) and they have grimaced at the low dividend yield year after year. It’s no wonder they are disappointed with the investment they made.

So, given that directors have benefitted through salaries over the last decade, is it now the turn of shareholders to receive significant pay-outs?

Chairman, Mervyn Keene, replied that while the pension scheme is in deficit the pension regulator will not permit annual dividends payments to be greater than the deficit reduction payments made to the pension scheme.

Dividends are £216,000 and pension contributions (for closing the deficit) are £336,000. Clearly, there is a constraint of sorts here, at least there is when the £336,000 limit is reached.  However, that on its own doesn’t explain why dividends can’t rise by 20% for a few years before bumping up to the pension contribution limit.

Both pension schemes closed to new members years ago. On the underfunded scheme, liabilities are £9.4m and assets £6.6m plus a tax asset of £0.5m leaving a deficit of £2.3m.

(I got the impression the directors are disappointed that the pensions regulator estimates the pension liabilities as high as it does – many pensioners are now well past average life expectancy so the numbers receiving pension drop each year.

Building up the balance sheet

The directors then put forward a different argument: they needed to strengthen the balance sheet before significantly raising the dividend.

I was somewhat confused on this point because the cash balance in December was about £5m and the dividend costs £216,600 per year.   Surely, there is potential to raise the dividend?

I was told that the 31 December snapshot of the balance sheet flatters the finance picture. There are points during the year when the company is forced to rely on an overdraft in the region of £3m.

To get some feel for this I’ve looked at the half year reports as well as the annual reports:

Balance sheet data                                                                                            

It would seem during the summer the combined valued of inventory and receivables is higher than in December by about £3m – £6m. Some of this is financed by the rise in payables, of the order of £1.5m – £3m. But I would imagine that Tandem must pay these suppliers during the summer and autumn.  We were told at the AGM, some customers push for 120 days credit, adding an extra strain.

Even by June, let alone by September-November when stock levels are high in the lead up to Christmas, Tandem’s cash balance is down to around £1m while its debt (including invoice discounting debt) is around £5m – £7m.

I can see from those numbers that when Argos and other customers are insisting on availability of product in the second half of the year, but not paying for it until say December, that the company could come under a temporary cash flow strain and therefore need access an overdraft.

This dependence on bank borrowing and invoice discounting is a small weakness I failed to spot in my earlier analysis and I’m grateful to the directors for pointing me in the right direction.

I agree that it would be more comfortable if our company had a larger cash buffer to support the rise in inventory and receivables during the second half of the year rather relying on banks.  It’ll be better to avoid interest charges and it’ll almost eliminate financial distress risk.

But what of the medium term?

For now I’m content to leave the dividend

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